Modern construction sites today are teeming with tradesmen, engineers, architects, big sophisticated equipment, and countless infrastructure features that allow for the successful completion of ambitious building projects.
All of these moving parts, however, require an equally complex legal framework of construction contracts. The contract documents, frequently amended as a project progresses, serves as the primary to-do list for the owner, general contractor, subcontractors, and all other parties involved in the project. Unfortunately, many aspects of a modern construction job that should be formalized in the construction contract are overlooked, poorly communicated—or, even worse, left to a handshake.
In this first in a two-part series on construction contract best practices, we’ll walk through how to appropriately define responsibilities, set forth payment terms, and accommodate inevitable schedule changes.
SCOPE OF WORK
To organize a construction project and define everyone’s role on the job, each contractor’s scope of work must be carefully described in the contract documents. The scope provisions detail what the subcontractors are and are not supposed to do, the sequence of their work, and when each step along the way should be completed.
Many construction contract disputes arise because of scope ambiguities. Contractual scope provisions should be precise as to where each subcontractor’s work starts and another’s stops, as well as clearly spell out other important aspects of the project, including:
- Inclusion or exclusion of any work that deviates from typical construction.
- A flow-down clause to ensure every facet of the work is accounted for and that all parties are on the same page.
- A process for reviewing site conditions and taking field measurements.
- Controlling delivery of materials and assigning responsibility for protecting them.
- Assigning responsibility for complying with local building codes, obtaining permits, and paying related fees.
- Detailing temporary facilities that will be on-site, including scaffolding, hoisting services, traffic control, office space, and bathrooms, and specifying who will provide them, as well as cleanup and disposal of debris.
- Provide information on accessing site resources, including water, power, storage space, access to work areas, deliveries, and specialized equipment or tools.
- Requiring compliance with applicable laws, local ordinances, governmental rules, regulations, and orders.
TIME
The construction schedule is near-and-dear to the heart of every member of a build team. For general contractors, keeping a schedule up-to-date and accurate allows project managers to finish the job successfully and on time. For subcontractors, knowing all of the details of their responsibilities well in advance allows them to allocate labor and materials efficiently.
But often, the interests of contractors and subcontractors are at odds with each other when it comes to inevitable schedule changes, and it can be a predictable flashpoint between the affected parties. In any complex job, delays are inevitable and there’s a cascading impact on everyone else involved. As general contractors are responsible for the overall success of the project, it’s important that they negotiate for sole and explicit contractual authority to adjust the project schedule.
That said, general contractors should solicit feedback from their subcontractors at the beginning of the process and provide regular schedule updates once a project has started.
A recent Illinois appellate court decision involving the redevelopment of the Palmolive Building in Chicago underscores the importance for contractors to spell out and stick to a schedule defining when subcontracted work is to be completed. In the case, the appeals court agreed that the general contractor was entitled to damages from a demolition subcontractor that fell behind the schedule and failed to fulfill its contractual obligation to finish the work on time. Moreover, the demolition subcontractor was not entitled to compensation for interferences, such as hold-over office tenants and shut-down resulting from noise complaints from nearby hotels because it knew of these issues when it signed the subcontract.
PAYMENTS
Too frequently, construction contract payment terms lack the specificity that complex jobs today demand. The legal language is either vague or not written around each project’s unique circumstances. In some extreme cases, it’s not included in the contract at all. There’s more to cover than procedure for routine monthly payment applications, retainage, and lien waivers. The contract should anticipate what can go wrong and deal with it in advance.
Poorly written or nonexistent payment terms in contracts usually are resolved in one place: before a judge. Even more, it’s important that the exact terms of the deal address the issue of financial responsibility if an owner doesn’t pay.
That’s why, if your state allows it, general contractors typically are advised to include a firm “paid-if-paid” clause in all subcontracts, rather than a “paid-when-paid” clause, which does not transfer the risk of nonpayment. Conversely, subcontractors should be cautious about accepting form subcontracts that state that the general contractor’s receipt of payment from the owner is a “condition precedent” to any duty to pay the subcontractor. A properly written paid-if-paid clause can protect the general contractor in the event of owner nonpayment, a not infrequent occurrence in tough economic times.
In addition, general contractors should require that all change orders and extra work be submitted in writing, consistent with state law, as well as address the following issues before all work begins, if necessary:
- Suspension of the work
- Multiple mobilizations
- Termination of the subcontractor
- Insurance and subrogation
- Damages for delay
- Liquidated damages
- Waiver of consequential damages
- Payments held in trust
- Right of set-off
- Prompt Payment Act waiver ■
About The Author:
Mr. Fylstra is director shareholder at the Chicago law firm Kubasiak, Fylstra, Thorpe & Rotunno, P.C. He concentrates his law practice in business litigation, including the representation of business organizations and individuals in all courts. With extensive experience representing contractors, industrial companies, and financial organizations, his litigation practice includes complex construction cases, insurance disputes, real estate litigation, oil and gas litigation, Uniform Commercial Code matters, and intellectual property litigation. He can be reached at rfylstra@kftrlaw.com.
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Modern Contractor Solutions, May 2013
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